Higher provisions for impairment losses hurt earnings in 2014; risk control more important

Profit growth slowed for the Chinese banking sector last year while bad loans continued to rise amid pressure from an economic downturn.

The Agricultural Bank of China Ltd said on Tuesday that its year-on-year growth in net profit was just 8 percent in 2014, compared with 14.5 percent in 2013.

The lender's nonperforming loan ratio rose by 32 basis points to 1.54 percent at the end of last year, above the national average of 1.25 percent for commercial banks.

Song Xianping, chief risk officer of the bank, said: "After the Chinese economy entered a stage of 'new normal'－a phrase introduced by President Xi Jinping to describe slower growth but of better quality－it will be normal for the NPL ratio of the banking sector to reach 2 to 3 percent."

China Merchants Bank Co Ltd reported that its net profit attributable to the bank's shareholders increased 8.06 percent from a year earlier in 2014, compared with 14.3 percent in 2013, the slowest growth for the lender since 2009.

China CITIC Bank Corp Ltd also announced a fall in net profit growth year-on-year, from 26.24 percent in 2013 to 3.87 percent in 2014.

Analysts said the slowdown in profit growth for these banks is mainly because they set aside a much larger amount of provision for potential losses, which greatly increased their credit costs.

Mu Hua, a banking analyst with GF Securities Co Ltd, said: "China Merchants Bank had a 25 percent growth in net operating income last year. Keeping that in mind, we found that the decline in net profit growth was mainly caused by the bank's significant increase in the provision for impairment losses."

In 2014, impairment losses on assets of China Merchants Bank and its subsidiaries were 31.68 billion yuan ($5.1 billion), up 210.05 percent from that of 2013.

"With nonperforming loans on the rise, the bank accelerated bad debt write-offs. Both factors led to the growth of the provision for impairment losses," Mu said.

Annual results of the bank showed that its nonperforming loan ratio was 1.11 percent as of Dec 31, up by 28 basis points from the previous year. The bank wrote off bad loans worth 14.92 billion yuan last year, compared with 2.13 billion yuan in 2013.

Some other banks such as China CITIC Bank had a similar problem. Its net profit growth fell behind the country's gross domestic product growth of 7.4 percent last year, although its pre-provision operating profit increased by 21.33 percent year-on-year.

Li Qingping, president of China CITIC Bank, said on Tuesday: "The Chinese economy has entered a new phase that is different from the high-speed growth pattern in the past. Under such circumstances, we consolidated the foundation for development by enhancing asset quality and risk control."

Last year, the bank and its subsidiaries wrote off bad loans worth 11.61 billion yuan and its provision for impairment losses on assets increased 95 percent from a year earlier to 22.07 billion yuan as of Dec 31. Its NPL ratio also increased 27 basis points to 1.3 percent.

"With economic growth set to slow further this year, bad loans will continue to rebound. This, combined with narrowing net interest margins amid interest rate liberalization and rate cuts, will negatively affect profit growth for banks," said Mu from GF Securities.

Ni Jun, partner of Guangzhou-based Qianchi Asset Management, said the average NPL ratio for the Chinese banking sector will rise by more than 20 basis points in 2015 and bad loan write-offs will increase 40 to 50 percent.